Case Summaries

The petitioner occasionally made loans to friends, acquaintances and business associates, doing so 12 times over a six-year period without the normal formalities associated with a lending business.  He did not hold himself out as in the business of lending money and did not keep business records that were close to adequate, and did not perform "due diligence" with respect to any loans that he made.  He made a loan to a construction company which failed to pay its $925,000 loan upon it becoming due in 2007.  The company filed for reorganization bankruptcy in 2008 showing assets of over $62 million and liabilities of over $34 million.  The petitioner did not file a claim in the bankruptcy.  Ultimately, the case was converted to Chapter 7 from Chapter 11.  The petitioner filed an amended return claiming a business bad debt deduction (ordinary loss deductible on debt that becomes partially worthless) on the 2008 return.  The petitioner argued that if the loss wasn't deductible in 2008, it was in 2009.  The court held that the loan would not qualify as a business bad debt, but that any bad debt would be a non-business bad debt (deductible as a short-term capital loss  in the year in which the debt becomes wholly worthless).  The court determined that the plaintiff had failed to show that the debt was completely worthless in either 2008 or 2009.  Instead, the court pointed out that the petitioner first acted as if the debt was worthless in 2010 when he filed his amended 2008 return.  The company's filing of bankruptcy that year was insufficient to show that the debt was worthless in 2008 because it was not clear at that time that the company was insolvent.  Cooper v. Comr., T.C. Memo. 2015-191.     

The regular percentage depletion rate for independent producers and royalty owners remains at 15 percent for calendar year 2015.  The regular percentage depletion rate for independent producers and royalty owners is 15 percent. For qualifying marginal production (less than 15 daily barrels of oil equivalent per day) the 15 percent rate is increased by one percentage point for each dollar the price of crude oil is less than $20 per barrel.   With the barrel price exceeding $20 per barrel, there is no increase to the 15 percent rate.  Percentage depletion for oil and gas production is 15 percent of gross revenue limited to 100 percent of a property’s net income.  IRS Notice 2015-65, 2015-40 IRB 466.

The petitioner, 47 years old, withdrew funds from her IRA to pay her son’s medical expenses.  Her son was not claimed as a dependent on her return.  She did not pay the additional 10 percent penalty on the withdrawal required under I.R.C. Sec. 72(t).  The IRS assessed the additional penalty and the court upheld the IRS position.  The court noted that the petitioner did not claim her son as a dependent on her return for the tax year in issue and that he did not otherwise qualify as a dependent under I.R.C. Sec. 152, which would have avoided the penalty on the withdrawn amount to the extent of what the taxpayer could have claimed as a deduction for qualified medical expenses under I.R.C. Sec. 213.  Unlike a health savings account, where the withdrawn amounts used to pay for the son’s medical expenses would have also been tax-free if the son had been a dependent, the withdrawn amounts from the IRA are taxable.  Ireland v. Comr., T.C. Sum. Op. 2015-60.  

The defendant imports baby worms from Europe and feeds and grows them in “worm houses” on its property, a 750-acre tract on which corn is grown to ensure a quality feed supply for the worms.  The corn is made into silage and combined with a mixture of peat moss, lime and water, and then is fed to the worms until they are “harvested.”  The defendant did not pay its employees overtime based on the exemption from the overtime pay requirement for agricultural employees contained in 29 U.S.C. Sec. 213(b)(12) of the Fair Labor Standards Act (FLSA).  The trial court ruled for the defendant on the basis that the growing and raising of worms constituted “agriculture” and the plaintiffs, employees, appealed.  On appeal, the court affirmed.  The court determined that 29 U.S.C. Sec. 203(f) was broad in that it covered “the production, cultivation, growing, and harvesting of any agricultural or horticultural commodity.” “Agriculture” was defined as “farming”, which included agricultural commodities and the court determined that worms are like “cultivated commodities.”  Simply because the worms were raised for bait did not deprive them of their agricultural character.  The worms are raised and harvested like an ag commodity.  Thus, the defendant was not required to pay overtime wages to its employees as they were agricultural employees.  Barks, et al. v. Silver Bait, LLC, No. 15-1575, 2015 U.S. App. LEXIS 17310 (6th Cir. Oct. 2, 2015).     

The petitioners, a married couple, bought a 10-acre tract in 2006 on which they built their residence and also barns and a horse riding arena used in their LLC's  horse boarding and sales business.  The business sustained a loss of almost $100,000 in 2009 showing up as negative gross income on their joint return.  The riding arena suffered from construction defects, requiring additional sums to be spent to resolve the problem.  During 2009, the husband conducted his (very limited) law practice from an office in the residence.  The petitioner shared the office with his (much younger) wife who is an equestrian a realtor and experienced horse jumper.  The couple's joint return included over $12,000 of "other expenses" consisting, in part, of telephone expenses and $25 of "miscellaneous" expenses.  The petitioners claimed expenses for five telephone lines and internet service.  The IRS disallowed half of the deductions for telephone expenses and all of the miscellaneous expenses, and a claimed casualty loss deduction.  The IRS also imposed an accuracy-related penalty.  the court sustained the IRS determinations.  On the telephone expenses, the court noted that the petitioners did not tie any expenses to any particular telephone line or business activity.  The miscellaneous deductions were also disallowed for lack of explanation.  The riding arena did not sustain a casualty loss because the construction defects giving rise to the extra expenses were not "sudden, unusual or unexpected in nature."  Costs associated with faulty construction are not deductible.  In addition, the loss was not sustained in the conduct of a trade or business and the petitioners continued to use the asset.  The riding arena was not sold, abandoned or permanently withdrawn from use during 2009.  The court upheld the accuracy-related penalty with respect to the adjustments conceded to and the disallowance of the deduction for miscellaneous expenses.  Wideman v. Comr., T.C. Summary Op. 2015-61.

A trust had been created for the benefit of the taxpayer's husband and his children from a prior marriage before the taxpayer was born.  The trust specified that the taxpayer would receive half of the current income during her husband's life and all of the income if he pre-deceased her until the death of the husband and his two siblings.  A second trust established before the taxpayer's marriage to the husband paid the taxpayer a fixed annuity with staged principal distributions upon the taxpayer reaching various ages so long as the taxpayer and the husband were co-habituating.  Upon marriage the taxpayer's trust interest would end unless she disclaimed her interest in the first trust with the remainder being split among the husband's grandchildren or descendants.  The taxpayer knew nothing about the second trust until after it was established and proposed to disclaim her interest in the first trust within nine months of the marriage to her husband.  The IRS allowed the disclaimer because it was within reasonable time after she obtained knowledge of her interest according to Treas. Reg. Sec. 25. 2511-1(c), and the disclaimer would not be treated as a taxable gift.  The IRS noted that the trust involved was created before 1977 under a different set of rules than now apply.  Priv. Ltr. Rul. 201540006 (Jun. 11, 2015). 

The petitioner claimed that he lost his business records in a flood, but he was still able to produce large amounts or records that were disorganized.  The court held that the records failed to show the business purposes of particular expenses and were not helpful in distinguishing the type of expenses incurred - reimbursed or non-reimbursed.  While the petitioner had information for the years in issue, he made no attempt to reconstruct his claimed business expenses.  Consequently, some of his claimed business expenses were denied.  Young v. Comr., T.C. Memo. 2015-189.

The petitioner sought a redetermination from the Tax Court and the petition was delivered to the court on the 98th day - 8 days beyond the 90-day deadline.  Normally, the petition is considered to have been filed at the time of mailing.  The petition's envelope included a "postmark" by on the 90th day.  However, the envelope also had a certified mail label with a tracking number and tracking data of the U.S. Postal Service showed that the USPS received the envelope on the 92nd day.  The court ignored the "postmark" and held that the petition had not been timely filed.  Tilden v. Comr., T.C. Memo. 2015-188

The petitioner's S corporation claimed a net operating loss (NOL) as a result of writing down real estate holdings due to the collapse of the real estate market.  The petitioner claimed that the properties had been abandoned in that same year or had become worthless.  The IRS disallowed the NOL and the court agreed.  The petitioner never abandoned the properties and a loss on account of worthlessness of property that is mortgaged, the court noted, means worthless of the petitioner's equity in accordance with I.R.C. Sec. 165.  The court noted that, with respect to recourse debt, the petitioner could not claim any loss deduction until the year in which a foreclosure sale occurs.  Thus, the petitioner was not entitled to any deduction until some point in the future.  Tucker v. Comr., T.C. Memo. 2015-185.

The petitioner's S corporation sustained losses which the petitioner carried forward to offset income in the carry forward years.  The IRS denied the carry forward of the NOLs because the petitioner did not establish that he had waived the carryback period, failed to show that the losses had not been absorbed in an earlier year, and even failed to show that the S corporation incurred the losses.  The court agreed with the IRS and also noted that the petitioner failed to show that the petitioner had sufficient basis in the S corporation shares.  Jasperson v. Comr., T.C. Memo. 2015-186. 

The decedent died in 1990 and an estate tax return was timely filed by the extended due date with an election to pay the tax in installments via I.R.C. Sec. 6166.  The IRS assessed the reported estate tax of $270,737 and the tentative Sec. 6166 deferred tax billing account was established.  The estate paid $70,00 of estate tax, and later voluntarily paid another $115,000 in estate tax.  In 1994, the IRS issued a deficiency notice asserting that additional estate tax of almost $700,000 was due based largely on valuation increases of inherited property.  The estate voluntarily paid another $42,480 in estate tax, and filed a petition in Tax Court challenging the IRS assessment of additional tax.  The estate distributed property to all beneficiaries except the one who inherited the property that had the valuation increases.  In 1995, the executor filed an inventory with the probate court listing $443,916 of estate assets.  In 1996, the estate's assets were distributed and an accounting was filed showing that the estate had zero assets.  In 2001, the IRS assessed a deficiency of $247, 714 based on a Tax Court opinion issued in late 2000 in the matter.  With interest, the deficiency was $518,451.   In late 2001, the IRS sent a statement of tax due to the estate showing a tax due of $619,794 with the estate having 10 days to pay this amount.  The estate did not respond and the IRS, in 2002, issued a notice and demand for payment of $839,897, stating that the I.R.C. Sec. 6166 installment agreement was in default due to non-payment and the account was in danger of being accelerated making the full account balance due immediately and noting that to avoid acceleration the amount due was due by Sept. 30, 2002.  The estate did not respond.  Meanwhile, the estate had never made installment payments on the estate tax under the I.R.C. Sec. 6166 election.  In 2009, the executor filed  a report with the probate court reporting zero assets in the estate and requesting that the estate be closed.  In late 2012, the IRS filed notices of federal tax liens against the estate in jurisdictions where all real estate assets were located, and in 2013 sued to collect the unpaid tax liability.  The trial court held that the I.R.C. Sec. 6166 election was terminated on the acceleration date specified in the notice and demand for payment for past-due amounts - Sept. 30, 2002 - which triggered the running of the 10-year statute of limitations for IRS to collect tax under I.R.C. Sec. 6502(a).  The IRS had argued that the statute had been suspended under I.R.C. Sec. 6503.  The court noted that I.R.C. Sec. 6166(g)(3) says that the 10-year limitations period begins when the estate fails to pay any principal or interest under the installment agreement, or the IRS serves a notice and demand for taxes due.  On appeal, the court affirmed.  The 2002 notice gave notice that the installment election had been terminated unless the estate made payment.  The IRS filed suit outside the 10-year statute.  The court noted that after the executor had distributed all of the  estate assets, there were no assets under the control of the probate court and from that time on the suspension of the statute of limitations was lifted because normal IRS collection procedures would have then been available against the assets that had been distributed.  But, IRS took no action.  United States v. Godley, No. 3:13-cv-549-RJC-DCK, 2015 U.S. Dist. LEXIS 132671 (W.D. N.C. Sept. 30, 2015). 

The defendant is a family-owned farming business (member-managed LLC) that raises, fattens and sells its own cattle.  It does not carry workers' compensation insurance because it is a privately owned agricultural business.  The defendant hired the plaintiff in 2007 as a truck driver to haul cattle and feed.  In 2012, the defendant was hauling feed for the defendant when he slipped on ice and injured himself becoming totally and permanently disabled for Social Security disability purposes.  The plaintiff sued to recover for his disability and the defendant moved for summary judgment as exempt from the requirement to purchase workers' compensation insurance under S.D.C.L. Sec. 62-3-15 which exempts "farm or agricultural laborers" from the workers' compensation system.  The trial court granted summary judgment for the defendant.  On appeal, the court affirmed.  The court  examined the overall nature of the plaintiff's work with respect to the employer's business and determined that the totality of the circumstances revealed that the work was agricultural in nature.  The defendant's business was exclusively agricultural and not commercial in nature.  Hofer v. Redstone Feeders, LLC, No. 2794, 2015 S.D. LEXIS 128 (Sept. 30, 2015).      

At issue in this case was the proper determination of the fair market value of the plaintiff's 229.24-acre commercial property for property tax purposes.  110 acres of the tract contained buildings and other improvements with the balance of the tract considered to be "excess" land.  The tract had been previously used by the U.S. Navy to operate a weapons manufacturing plant where they buried numerous contaminants which resulted in significant environmental damage to the tract.  The tract became subject to an environmental remediation agreement under which the plaintiff was partly responsible for remediation costs.  In 2003, the defendant notified the plaintiff of its intent to increase the tract's property tax assessment.  The plaintiff filed an appeal with the county Board, which affirmed.  The matter then proceeded to court which affirmed.  On further review, the appellate court affirmed in part and vacated and remanded in part.  The appellate court noted that an appraisal must be based on the tract's current status, considering it's potential for development, and that the trial court's reliance on one of the experts was not supported by the evidence.  The appellate court also noted that restrictions on the tract impacted the tract's market value.  The appellate court vacated the trial court's order and remanded the case for calculation of the assessed value with consideration of the plaintiff's environmental obligations.  On further review, the state (PA) Supreme Court upheld an appraiser's opinion that the value of the tract was fair market value less five percent for environmental "stigma."  Harley-Davidson Motor Company v. Springettsbury Township, et al., No. 82 MAP 2014, 2015 Pa. LEXIS 2170 (Pa. Sup. Ct. Sept. 29, 2015).  

In 2011, the defendant (U.S. EPA) proposed a rule that would have required a confined animal feeding operation (CAFO) to release comprehensive data providing precise CAFO locations, animal types, and number of head as well as personal contact information including names addresses, phone numbers and email addresses of CAFO owners.  The Department of Homeland Security (DHS) had informed the defendant that the release of such personal and confidential information could constitute a domestic safety risk.  The DHS pointed out that such personal business information  is exempted from disclosure under FOIA enumerated exemptions No. 4 and No. 6.  In an earlier challenge to the proposed rule, a different court held that the opponents to the rule lacked standing for failure to demonstrate an actual or imminent injury - American Farm Bureau Federation, et al. v. United States Environmental Protection Agency, et al., No. 13-1751 ADM/TNL, 2015 U.S. Dist. LEXIS 9106 (D. Minn. Jan. 27, 2015).  The defendant withdrew the proposed rule in 2012, reserving the right to developing a similar rule in the future.  The plaintiffs, various activist groups, generally opposed to confinement livestock facilities and related production activities challenged the defendant's withdrawal of the rule as a violation of the Administrative Procedures Act (APA).  The court granted summary judgment for the defendant given the greater deference owed to the defendant when it withdraws a rule and maintains the status quo.  The court agreed with the defendant that the better approach was to "explore, develop and assess" existing sources of data and keep an option open to require mandatory reporting of such information in the future.  The court also determined that the withdrawal of the rule did not violate the Clean Water Act.  Environmental Integrity Project, et al. v. McCarthy, No. 13-1306 (RDM), 2015 U.S. Dist. LEXIS 131653 (D. D.C. Sept. 29, 2015).

The plaintiffs, landowners adjacent to a railroad track that had been converted to a recreational trail, claimed that the government took their property without paying just compensation when the Surface Transportation Safety Board (STSB)  issued a Notice of Interim Trail Use (NITU) under the National Trail System Act Amendments of 1983 to allow the Union Pacific Railroad (U.P.) and the local county to negotiate trail use over a portion of the rail corridor in the county.  The plaintiffs claimed that they owned the underlying fee simple interest in the corridor.  The government argued that the property deeds subject to easements for railroad use in the early 1900s did not belong to the current landowners because the land surrounding the railroad was exempt from the deeds upon their transfer and contemplated public recreational use.  The court disagreed with the government's position.  The court determined that the easements did not contemplate public recreational use and state (OR) law clearly stated that rail traffic and pedestrian or cycling uses within the same space not compatible.  However, the court found that a few deeds included a simple transfer of land to the railroad companies and those landowners were not entitled to compensation.  However, deeds using "right of way" language and where the railroad's fee interest was "nominal" transferred only an easement and not ownership.  Thus, approximately 80 percent of the landowner/plaintiffs will be entitled to compensation for the taking triggered by the conversion to a trail.  Boyer, et al. v. United States, No. 14-33L, 2015 U.S. Claims LEXIS 1236 (Fed. Cl. Sept. 25, 2015).   

A farmer entered into a contract with a third party for the construction of a hog building that would utilize the defendant’s trusses.  The building was completed in the spring of 2008, but during the winter of 2014, several of the trusses failed which caused a large portion of the roof of the hog building to collapse and killed many hogs.  The farmer had taken out an insurance policy with the plaintiff that covered the building.  The farmer submitted a claim for $338,381.00 and the plaintiff paid the claim - $300,000 for damage to the building, $30,000 for debris clean-up and $8,381 to the hog supplier for loss of their hogs covered under the farmer’s policy.  The plaintiff then sued the defendant claiming that their loss of $338,381 was caused by a manufacturing defect in the defendant’s trusses – a breach of implied warranty claim.  The defendant move to dismiss the claim and the court agreed.  The plaintiff’s claim arose out of the construction of a hog building in which the defendant’s trusses were used and the building was used in a commercial business and the damage was to the building itself and livestock in the building which were all covered under the plaintiff’s insurance policy.  As such, the economic loss doctrine applied to bar the tort action.  The losses were purely economic in nature.  Farm Bureau Mutual Insurance Company of Michigan, et al. v. Borkholder Buildings & Supply, L.L.C., No. 1:14-cv-1118, 2015 U.S. Dist. LEXIS 128830 (W.D. Mich. Sept. 25, 2015).

The plaintiff was in the business of selling “unit doses” of drugs in non-reusable container intended for single-dose administration to patients.  The plaintiff bought the drugs it identifies as suitable for unit doses in bulk and then engages in operating procedures for the processes and equipment to be used in converting the drugs purchased in bulk into unit doses.  The IRS denied a domestic production activities deduction (DPAD) under I.R.C. Sec. 199 on the basis that the plaintiff’s activities constituted “packaging, repackaging, labeling and minor assembly” under Treas. Reg. Sec. 1.199-3(e)(2).  The plaintiff claimed that its activities were comparable to the taxpayer’s activities in United States v. Dean, 945 F. Supp. 2d 1110 (C.D. Cal. 2013) where the taxpayer assembled gift baskets and was allowed a DPAD.  The court agreed with the taxpayer in this case and allowed the DPAD on the basis that the activities involved were analogous to those in Dean.  The court believed that activities beyond mere packaging and repackaging were involved, including market research to identify which drugs to buy, testing of drugs, studies involving the mixing of drugs, testing of plastics, and other related activities.  As such, the plaintiff was engaged in a production process and was entitled to a DPAD on its qualified production income.  While the case was decided after the IRS proposed new DPAD regulations containing an example noting the disagreement of the IRS with the result of Dean, the court’s opinion did not involve any analysis or application of those regulations.  Precision Dose, Inc. v. United States, No. 12 C 50180, 2015 U.S. Dist. LEXIS 128115 (N.D. Ill. Sept. 24, 2015). 

The parties' properties were separated by a railroad track.  A 100 foot right-of way extended on each side of the track.  The plaintiff took over farming his side of the track in 1994 for crop production purposes, and the defendant acquired its interest in its tract (which was primarily used for cattle grazing) in 1993 via a deed from the county.  The property line between the tracts was the centerline of the railroad right-of-way.  A fence had been built in the early 1960s on the defendant's side of the track beyond the 100-ft right of way as a matter of convenience.  By 2012, the fence was dilapidated and the defendant's tenant rebuilt the fence on the property line with a portion built over on the defendant's land to allow the plaintiff's machinery to access the plaintiff's property via a trestle over a creek.  The plaintiff objected to the location of the fence and sought to quiet title in himself of the strip of land from the property line to the position of the old fence either under a theory of acquiescence or adverse possession.  The trial court disagreed with the plaintiff on both theories and the plaintiff appealed.  The appellate court affirmed, finding that the evidence did not show that both parties recognized the fence as a boundary fence rather than just a barrier for cattle.  Thus, there was no acquiescence as to a boundary for the statutory 10-year period.  The defendant's tenant always maintained the fence in order to keep cattle in and viewed the fence as his own and never recognized it as a boundary fence.  The court also agreed with the trial court that the adverse possession claim failed.  The defendant always paid the property taxes on the disputed property negating the plaintiff's claim that he had a good faith claim of title.  In addition, the plaintiff's possession was neither open or hostile.  The plaintiff sometimes posted "no hunting" signs on the property and several times a year drove machinery over the disputed tract.  This represented permissive rather than hostile use.  Mayhugh v. Dea, No. 15-0142, 2015 Iowa App. LEXIS 882 (Iowa Ct. App. Sept. 23, 2015).

This case was originally filed in 1997, and this is the second opinion of the state (UT) Supreme Court in the matter.  The father of the siblings involved in the case was diagnosed with cancer in 1966 and deeded his farm to his oldest son in early 1967 in an attempt to impoverish himself so that he could qualify for public assistance benefits to pay for his cancer treatments.  In 1993, the siblings learned that the eldest son considered the farm to be exclusively his when he conveyed a portion of the farm to a third party.  The eldest son sued in 1997 to quiet title and establish himself as the rightful owner of the farm.  The siblings counterclaimed and requested that they be named equal beneficiaries of a trust that their father intended.  The trial court, in the initial action, imposed a constructive trust on the farm, and the UT Supreme Court affirmed.  Rawlings v. Rawlings, 240 P.3d 754 (Utah 2010).  On remand, the eldest son claimed that the constructive trust should be in the form of an equitable lien and not a possessory interest in the farm or any other property.  The trial court disagreed and divided the property among the siblings.  The court also determined that the eldest son was a "conscious wrongdoer" and that any profits from the trust property be included in the trust res.  The court also permitted additional discovery on the issue of what properties should be included in the trust.  The eldest son didn't respond and the siblings moved to compel.  The eldest son was non-responsive and the trial court entered default judgment against him.  On further review, the UT Supreme Court affirmed.  The order of a constructive trust was appropriate to remedy the finding of unjust enrichment and it cannot be converted into an equitable lien.  The farm was equally divided among the children.  Rawlings v. Rawlings, No. 20130744, 2015 Utah LEXIS 265 (Utah Sept. 22, 2015). 

The plaintiff was injured when her all-terrain vehicle (ATV) rolled down a hill in a National Forest in Idaho.  The plaintiff sought almost $800,000 in damages for her injuries related to the crash that happened when she drove the ATV up a fence-crossing ramp over a cattle guard on a trail.  The ATV slipped off of the ramp and fell four feet, landing on top of the plaintiff.  The plaintiff claimed that the U.S. Forest Service was negligent in constructing and maintaining the fence crossing.  The court granted summary judgment to the defendant on the basis that it was immune from suit under the ID recreational use statute because of the plaintiff's failure to allege willful and wanton conduct.  A complaint grounded in "negligence" does not incorporate all degrees of negligent conduct and the plaintiff never alleged that the defendant acted with willful and wanton negligence.  There was no evidence that the defendant knew or had reason to know that the cattle guard ramp was a peril.  The cattle guard had been continuously used with no known accidents or incidents, and Forest Service personnel had inspected it annually and had observed that it was in working condition a week before the plaintiff's accident.  Linford v. United States, No. 4:13-cv-00194-BLW, 2015 U.S. Dist. LEXIS 126596 (D. Idaho Sept. 21, 2015).

The creditors sought summary judgment on their claim that the debtor’s obligation to them should not be discharged in his Chapter 7 bankruptcy proceeding.  The court granted the creditors’ motion, finding that the $135,000 debt was excepted from discharge under 11 U.S.C. § 523(a)(2)(A).  The court had already ruled in a December 17, 2013, decision, that the debtor’s bankruptcy should be converted from a Chapter 12 to a Chapter 7 case on the grounds of fraud.  The court found that the debtor did  not tell the creditors he had filed bankruptcy when he contracted with them for the sale of hay.  As a result, the law of the case applied to establish 11 U.S.C. §523(a)(2)(A)’s required elements: (1) fraudulent omission by the debtor; (2) knowledge of the deceptiveness of his conduct; (3) an intent to deceive; (4) justifiable reliance by the creditor; and (5) damage to the creditor).  In re Clark, No. 12-00649, 2014 Bankr. LEXIS 97 (Bankr. D. Idaho Jan. 10, 2014).  In a later decision, the court noted that during the pendency of the Chapter 12 case, the debtor had also sold a tractor to unrelated persons and deposited the funds into the bank account of a limited liability company (LLC) that he managed (but of which he was not a member or owner).  The trustee claimed that various against various defendants that the trustee claimed had received transfers from the LLC before the case was converted to Chapter 7.  The trustee later filed an avoidance action against the buyers of the tractor on the grounds that the transfer was avoidable.  The buyers claimed that the transfer of the tractor to them was not avoidable because of the two-year statute of limitations contained in 11 U.S.C. Sec. 549.  The court agreed that the transfer was avoidable because the trustee knew of the potentially avoidable transfer at the time the case was converted to Chapter 7 and the trustee obtained the LLC records, but never identified the purchasers.  Thus, the transfer was avoidable because the buyers had no notice that an avoidance action was contemplated until more than two years after the sale of the tractor.  In re Clark, No. 12-00649-TLM, 2015 Bankr. LEXIS 3167 (Bankr. D. Idaho Sept. 18, 2015).


The petitioner issued residual value insurance policies that insured lessors and lenders against not properly estimating the residual value of leased property at the end of the lease term.  Such policies insure the expected residual value remaining on an asset at the end of a lease.  The petitioner utilized the accounting rules of I.R.C. Sec. 832 applicable to insurers.  However, the IRS claimed that the petitioner was not an insurance company and that the policies they issued were merely a hedge against investment risk rather than truly insurance.  As a result, the IRS claimed that the I.R.C. Sec. 832 rules were inapplicable and that the petitioner had to use the rules contained in I.R.C. Secs. 451 and 461 resulting in a $55 million deficiency.  The IRS also cited Tech Adv. Memo. 201149021 (Aug. 30, 2011) to support its position.    The states that the petitioner operated in regulated the petitioner as an insurance company, and Fitch, Moody’s and S&P rated the petitioner as an insurer.  The petitioner offered evidence that it insured against “low frequency/high severity” risks such as earthquakes or floods,” but the IRS claimed that the risk was illusory.  The court rejected the IRS position because of evidence showing risk-shifting and risk-distribution.  A real risk of loss was being covered.  In addition, the court noted that every state in which the petitioner did business the state regulates the petitioner as an insurer.  R.V.I. Guaranty Co., Ltd. & Subsidiaries, 145 T.C. 9 (2015).

The decedent died testate in late 2008.  At the time of his death, the decedent was not married, had no children, and both of his parents had predeceased him.  The Form 1041 for the estate was filed in April of 2012 reporting $335,854 of income and claimed a $314,942 charitable deduction.  The IRS disallowed the charitable deduction in its entirety, claiming that the amount had not been permanently set aside for charity as required by I.R.C. §642(c)(2).  The decedent’s will, executed in 1983, instructed the executor to pay all estate expenses and costs from the general estate, and conveyed 100 percent of the residuary estate to the church that the decedent regularly attended.  There was no provision in the will specifically providing for gross income to be permanently set aside or separated into distinct accounts.  Over a timeframe of several years, the estate tried to determine whether there were any unascertained heirs with several being identified as potential heirs.  Ultimately, the will was challenged and a proposed settlement was reached with two thirds of the decedent’s gross probate estate.  The court noted that, to claim a charitable deduction, the estate must show that the contribution was from the estate’s gross income, that the will/trust terms made the charitable contribution, and that the charitable contribution was permanently set aside for charitable purposes in accordance with I.R.C. Sec. 170(c).  The IRS did not challenge the first two requirements, but claimed that the residue of the estate was not permanently set aside for charitable purposes.  The court agreed with the IRS that it had not.  The court noted that the chance the charitable amount was go to non-charitable beneficiaries for the year in issue was not so remote as to be negligible.  The proposed settlement was evidence of the ongoing legal battle that had not yet concluded.  he court noted that for the year in issue the estate was in the midst of a legal battle and had ongoing undetermined expenses, and their remained a possibility that the amount set aside for the churches that the decedent attended would go to the challengers.  Estate of DiMarco v. Comr., T.C. Memo. 2015-184.

The petitioner was a cardiologist and his wife also worked in his practice.  They constructed a house in 1997 and tried to sell it for four years, after which they rented the house for four years to an unrelated tenant, and then to their daughter at one-third of the amount it was rented to the unrelated tenant.  They resumed sales efforts in 2010.  On their 2008 return, the petitioners indicated the house was rental property with a net loss of $134,360 which they characterized as a passive loss on Form 8582.  On the 2009 and 2010 returns the petitions again showed net losses on the property, but indicated they were in the construction business.  They filed a 2008 amended return claiming a refund relating to expenses claimed on the house, which IRS disallowed and also assessed an accuracy-related penalty.  The IRS determined that the house was held for the production of income and that the losses were passive losses under I.R.C. Sec. 469.  The IRS also asserted that the deductions attributable to the house were limited by I.R.C. Sec. 280A.  The court agreed with the IRS because a related party lived in the house and used it for personal purposes for more than the greater of 14 days a year or 10% of the number of days the house was rented at fair rental. The court rejected the petitioners’ claim that they were real estate developers that needed to have their daughter live in the house to keep it occupied as required by their homeowners policy which would then make Sec. 280A inapplicable.  Thus, the deductions attributable to the house were limited to the extent of rental income. The court upheld the application of the accuracy-related penalty, and did not need to determine whether the losses were passive.  Okonkwo v. Comr., T.C. Memo. 2015-181.


In 2009, the plaintiff bought two multi-peril crop insurance policies (one for each of the plaintiff's two farms) that the defendant reinsured through the federal crop insurance corporation (FCIC).  The policies each provided a tobacco crop yield guaranty which guaranteed a minimum yield at $1.85/lb.  The plaintiff's 2009 tobacco crop harvest did not meet yield and quality expectations and the losses were reported to the defendant as attributable to plant disease.  The policy paid on one of the farms, and after an investigation, the defendant attributed losses on the other farm to various diseases and adverse weather conditions.  The defendant made a final decision with respect to this policy that no indemnity payment was due because the plaintiff failed to timely harvest the crop and failed to purchase and apply the proper fungicides.  The defendant also found that the plaintiff had inadequate barn space to cure all of its tobacco, which led to the untimely harvesting resulting in deterioration of the crop in the field.  The plaintiff sought mediation and administrative review, but mediation did not resolve the matter.  The defendant issued a revised final decision again finding that the lack of timely harvest and the failure to purchase and apply the proper fungicides contributed to the loss.  The revised decision recalculated the production lost due to uninsured causes, but the result remained that no indemnity would be paid.  The plaintiff sought administrative review, which resulted in a finding that there were both insured and uninsured losses, and the matter was remanded the matter for a calculation of the final indemnity amount.  The plaintiff appealed the matter to the defendant's National Appeals Division (NAD) and requested a hearing.  The result of the NAD hearing was that the outcome remained unchanged.  The plaintiff sought director review of the NAD decision, which upheld the NAD decision.  From the director review of the NAD decision, the plaintiff appealed for judicial review.  On review, the court determined that substantial evidence did not support the NAD Director's decision that plant disease did not contribute to the plaintiff's crop losses.  The court determined that the NAD Director failed to explain how the plaintiff's failure to timely harvest undermined the plaintiff's claim that the tobacco crop suffered from plant disease.  The court reasoned that plant disease and untimely harvesting are not mutually exclusive causes of loss.  The court denied the defendant's motion to dismiss and remanded the matter to the defendant to determined whether there is evidence that the plaintiff's crop suffered from plant disease and whether any disease entitled the plaintiff to an indemnity payment and whether proper methods were used to calculate the indemnity payment.  J.O.C. Farms, LLC v. Rural Community Insurance Agency, Inc. et al., No. 4:12-CV-186-D, 2015 U.S. Dist. LEXIS 124266 (E.D. N.C. Sept. 17, 2015).     

An IRS Form 2848 named three representatives to represent the taxpayer with the IRS. One of the representatives had not signed the form and another representative signed the form on that representative's behalf.  The IRS determined that the third representative had not been duly appointed.  The representative signing on the third representative's behalf simply signed his own name and did not indicate he was signing on the other party's behalf.  In addition, Form 2848 Section 5(a), Part I did not provide that representatives had the power to appoint another representative.  C.C.A. 201544024 (Sept. 16, 2015). 

The petitioner gifted cash and marketable securities to her three daughters on the condition (pursuant to written net gift agreement) that the daughters pay any related gift tax and pay any related estate tax on the gifted property if the petitioner died within three years of gifts.  The petitioner deducted the value of the daughters' agreement to be liable for gift or estate tax from value of gifts and IRS claimed the gift tax was understated by almost $2 million.  Each daughter and the petitioner were represented by separate counsel and an appraisal was undertaken using mortality tables to compute the petitioner's life expectancy which impacted values as reported on Form 709.  The IRS' primary argument was that the daughters' assumption of potential estate tax liability under I.R.C. Sec. 2035(b) did not increase petitioner's estate and, as such, did not amount to consideration in money or money's worth as defined by I.R.C. Sec. 2512(b) in exchange for gifted property.  The court determined that the primary question was whether the petitioner received any determinable amount in money or money's worth when the daughters agreed to pay the tax liability.  The court held that the petitioner did receive determinable value as to the gift tax.  Likewise, the court held that the assumption of potential estate tax liability may have sufficient value to reduce the petitioner's gift tax liability.  The court determined that it was immaterial that it was an intrafamily deal at issue because all persons were represented by separate counsel.  However, the court determined that fact issues remained for trial on the assumption of estate tax issue. Steinberg v. Comr., 141 T.C. No. 8 (2013).  In the subsequent opinion on the estate tax issue, the court held that the fair market value of the gifted property for gift tax purposes was reduced by the value of the daughters' assumption of the potential I.R.C. Sec. 2035(b) estate tax liability.  Steinberg v. Comr., 145 T.C. No. 7 (2015). 


Under I.R.C. §170(f)(8), a taxpayer claiming a charitable contribution deduction exceeding $250.00 must substantiate that deduction with a contemporaneous written acknowledge from the donee, showing the amount of the contribution, whether any good and services were received in return for the donation and a description and good faith estimate of any goods and services provided by the donee or that the donee provided only intangible religious benefits.  However, I.R.C. §170(f)(8)(D) says that the substantiation rules don’t apply if the donee files a return including the contemporaneous written acknowledgement information that the taxpayer was otherwise supposed to report.  This provision allows taxpayers to “cure” their failure to comply with the contemporaneous written acknowledgement requirement by the donee exempt organization filing an amended Form 990.  However, without any regulations, the IRS has taken the position that the statutory provision does not apply.  Apparently believing that their position was weak and would not be supported judicially, the proposed regulations acknowledge the exception and allow the charitable organization to file a form (yet to be announced) on or before February 28 of the year after the year of the donation that shows the name and address of the donee, the donor’s name and address, the donor’s tax identification number, the amount of cash and a description of any non-cash property donated, whether the donee provided any goods and services for the contribution, and a description and good faith estimate of the value of any goods and services the donee provided or a statement that the goods and services were only intangible religious benefits.  The form must be a timely filed form and cannot be filed at the time the taxpayer is under examination, and a copy of the form must be provided to the donor.  REG-138344-13 (Sept. 16, 2015); Prop. Treas. Reg. §§1.170A-13(f)(18)(i-iii). 

Before filing bankruptcy, the debtor created a self-directed IRA and upon later filing bankruptcy the debtor listed the IRA as an exempt asset under 11 U.S.C. Sec. 522(d)(12) and valued it at $180,000.  Before filing bankruptcy, the debtor and his wife created a partnership in which they each owned a 50 percent interest.  The partnership was created for real estate development purposes and complemented the debtor's construction business.  The partnership agreement provided that the IRA would contribute capital and a cash contribution to the partnership.  Ultimately, the IRA funded the purchase price of properties the partnership acquired and a deed conveyed a tract to the IRA.  The IRA later paid for development of a tract.  The debtor and the partnership filed bankruptcy, and the partnership listed both the debtor and the IRA as unsecured creditors.  The trustee and a bank objected to the claimed exemption for the IRA on the basis that the IRA had engaged in a prohibited transaction that caused it to lose its tax exempt status.  The bankruptcy court agreed that the IRA was not exempt, and the court affirmed on appeal.  The IRA engaged in prohibited transactions with disqualified persons by loaning funds to the partnership.  In re Kellerman, No. 4:15CV00347 JLH, 2015 U.S. Dist. LEXIS 122046 (E.D. Ark. Sept. 14, 2015).   

The parties entered into a contract involving the removal of chicken manure from egg-laying facilities.  Under the contract, the plaintiff agreed to pay the defendant for the transfer of manure ownership with tonnage to be tracked and billed according to the quantities listed on a manure management manifest.  The specific quantity of manure was to be determined by and mutually agreeable to both parties.  A dispute arose and the trial court denied the plaintiff's motion for preliminary injunction, concluding that the plaintiff did not prove by clear and convincing evidence that it was likely to prevail on its claim of breach of contract because it failed to prove that the contract required the defendant to provide any specific amount of chicken manure.  Ultimately, the trial court returned a verdict for the plaintiff.  On appeal, a primary question was whether the contract was a goods contract (sale of chicken manure) governed by the Uniform Commercial Code (UCC) or one for the sale of services (removal of chicken manure) governed by state (OH) common law.  The appellate court determined that the contract was one for the sale of goods - the transfer of manure ownership.  Thus, the contract was one for the sale of goods - chicken manure.  Supporting this finding, the court noted that the plaintiff did not bargain for any services to be provided by the defendant.  Instead, the plaintiff was responsible for the removal of manure which it would then resell and spread.  As such, the plaintiff's ultimate goal was to acquire a product rather than to procure a service.  As a contract subject to the UCC, the plaintiff argued that it was enforceable because it provided a sufficient quantity term ("all available tonnage per year of manure") or that it was a requirements contract.  The court determined that the contract was not a requirements contract because the contract was for the sale of the output of manure rather than the manure requirements of the plaintiff, and nothing in the contract barred the defendant from selling manure to another party or preclude the plaintiff from buying manure from another seller.  On the quantity issue, which is critical for the contract to be valid under the UCC, the court noted that the parties bargained to reserve quantity for the future agreement of both parties in accordance with future negotiations.  Thus, the contract did not contain an enforceable quantity term as quantity was subject to future agreement, and the contract was unenforceable as a matter of law.  As such, the appellate court reversed the trial court and remanded the case.  H & C Ag Services, LLC v. Ohio Fresh Eggs, LLC, et al., No. 6-15-02, 2015 Ohio App. LEXIS 3615 (Ohio Ct. App. Sept. 14, 2015).

The plaintiffs, a married couple, claimed that the defendant, an oil and gas company, failed to pay a lease bonus payment of $144,000 that the parties had agreed to.  The defendant delivered a "letter agreement" to the plaintiffs stating that the parties would execute and additional "Option to Exercise Oil and Gas Lease" and that the defendant would pay $100.00 per mineral acre and a 1/8th mineral owner's royalty with a primary term of four years.  The plaintiffs did not execute the letter agreement or the additional option agreement.  A final contract with different terms was ultimately entered into that stated that it became effective when the oil and gas lease described in it was approved and on approval of title.  Ultimately, the plaintiffs claimed that the defendant breached the lease and the letter agreement when it did not pay the bonus payment of $100/acre.  The plaintiffs also claimed that they incurred over $15,000 of expenses in clearing title defects and confirming marketable title and that by obtaining the recording the lease the defendant blocked the plaintiffs from entering into agreements with other potential oil and gas companies.  The defendant motioned to dismiss on the basis that no contract was formed between the parties.  The court agreed with the defendant on the basis that there was never any offer that the plaintiffs accepted and that there was no meeting of the minds on all points that left nothing for negotiation.  The court noted that there was no evidence that the plaintiffs accepted the letter agreement and the facts did not support an inference of acceptance.  Instead, the negotiations over several months resulted in a lease with a different party (the plaintiffs' farming operation) with different terms.  The plaintiffs never executed the agreement and the facts did not support the argument that the letter agreement had been incorporated into the parties' final contract.  there simply was no mutual manifestation of assent as to key contract terms.  The option agreement also never materialized.  Norberg, et al. v. Cottonwood Natural Resources, LTD, No. 8:15CV71, 2015 U.S. Dist. LEXIS 122057 (D. Neb. Sept. 14, 2015).

The plaintiff, a global agribusiness company that produces agricultural chemicals and seeds, had one of its genetically-modified corn traits approved for sale in the U.S. and other countries.  However, the Chinese had not been approved the trait for import, and they rejected the import of all U.S. corn in the fall of 2013.  Exporters, handlers, elevators and corn farmers claimed that the company's marketing of the trait before being accepted in China caused the market price for corn fall from mid-2012 to late 2014.  In late 2014, the various lawsuits were consolidated into multi-district litigation in Kansas federal court.  The lawsuit asserted that the company violated the Lanham Act by misleading stakeholders, the public and federal regulators concerning the status of the trait and its release into the marketplace.  The suit also alleged that the company breached a duty of care by the premature commercializing of the trait without necessary safeguards and by instituting a program that ensured the contamination of the U.S. corn supply.  The company filed various motions to dismiss the numerous claims.  The court dismissed claims based on an alleged failure to warn to the extent based on a lack of warnings in materials accompanying the trait because those claims were preempted by FIFRA; trespass to chattels claims (except those claims filed in Louisiana); corn farmers' claims for private nuisance, Lanham Act claims and claims under the Minnesota consumer protection statutory provisions.  Not dismissed were negligence claims based on a legal duty exercise reasonable care in the manner, timing and scope of the commercialization of the trait.  In re Syngenta AG MIR 162 Corn Litigation, No. 14-md-2591-JWL, 2015 U.S. Dist. LEXIS 124087 (D. Kan. Sept. 11, 2015). 

Confirmation in this Chapter 12 case was delayed  until the U.S. Supreme Court ruled in Hall, et ux. v. United States, 132 S. Ct. 1882 (2012) on whether post-petition taxes are dischargeable.  The court later determined that they were not estate obligations that could be treated as unsecured claims. The debtors reorganization plan was then submitted that proposed paying post-petition taxes through the plan with estate assets.  Confirmation was denied and the case converted to Chapter 7.  The debtors' real estate and equipment were sold and a Chapter 7 discharge was received. A junior secured creditor filed a motion for marshaling of assets. The bank held a first mortgage on land, a first priority lien on equipment and a first priority lien on crop proceeds and the creditor held a second priority lien on equipment and crop proceeds and no junior mortgage on the real estate.  There were insufficient funds in the debtors' bankruptcy estate to pay all claims and the IRS asserted a  claim for priority taxes.  If marshaling were denied, it would allow more non-tax debt to be paid and the debtors claimed that allowing marshaling would inhibit the debtors' fresh start.  The court noted that the “inequity” of another creditor receiving less or nothing is not a valid reason to deny marshaling.  Accordingly, the requirements for marshaling were satisfied.  The motion to marshal assets was granted because the real estate had been sold and, the court held that the fact that a creditor’s receipt of a portion of the sale proceeds would prevent the IRS debt from being reduced was not grounds to deny marshaling which, the court noted, prefers interests of the junior lienholder.  The court ordered that a hearing was to be held to address the issues of distribution, including trustee compensation.  In re Ferguson, No. 10-81401, 2013 Bankr. LEXIS 3386 (Bankr. C.D. Ill. Aug. 20, 2013).  On further review, the court reversed.  The court determined that the bankruptcy court mistakenly looked to the conditions present at the time of the original marshaling request to determine whether to allow marshaling.  Instead, the appellate court determined that the elements that permitted marshaling no longer existed because the crops and equipment had been sold with the proceeds of sale paying the priority lien.  Ferguson v. West Central, FS, Inc., No. 14-1071, 2015 U.S. Dist. LEXIS 121096 (C.D. Ill. Sept. 11, 2015).

The decedent executed a will in 1992 that left his multi-million dollar estate, after payment of debts and taxes, to his wife if she survived him.  If she did not survive the decedent, the will specified that the decedent’s estate was to be equally divided between his two granddaughters in trust for any of the two granddaughters that had not reached age 30 at the date of the decedent’s death and outright to any of the two granddaughters that had reached age 30 at the time of the decedent’s death.  If the decedent’s wife pre-deceased him, then the share passing to any of the granddaughters that also predeceased him would pass to that granddaughter’s children or the surviving granddaughter if there were no surviving children.  If the spouse and granddaughters did not survive and there were no surviving great grandchildren, the decedent’s estate was to pass to a specifically identified veterinarian.  The will did not mention the decedent’s son.  At the time of the decedent’s death, only the granddaughters survived, and they were both over age 30.  Within two weeks of the decedent’s death, the executor filed a petition to probate the will and start estate administration.  Interested parties were provided copies of the will and publication of notice to creditors was made in accordance with state (KS) law.  At the subsequent hearing, the magistrate judge admitted the will to probate.  The son did not attend the hearing.  About six weeks later, the son filed a petition to set aside the order admitting the will to probate, and a year later the trial court rejected the son’s petition, except that the court found that the will was not self-proving and that no evidence had been submitted from the will’s witnesses.  Thus, the magistrate’s order was set aside and a new hearing scheduled.  The subsequent hearing resulted in the will being admitted to probate.  A trial ensued on the son’s challenges to the will, resulting in the court finding that the will was valid and that the property should be distributed to the granddaughters.  On appeal, the court affirmed.  The court rejected the son’s claim that the will failed because it didn’t describe how the estate should be distributed to the granddaughters and, thus, the bequest failed resulting in an intestate estate that passed entirely to him.  The bequest was neither conditional nor unenforceable.  The court also rejected the son’s claim that a 1997 will superseded the 1992 will.  However, the court determined that argument was sheer speculation and that the existence of a 1997 was not proven.  In addition, even if such a will existed, it would not automatically revoke the 1992 will.  The son’s procedural attacks on the validity of the will also failed.  The court held that the lack of obtaining an order from the trial court confirming the initial hearing date was not fatal and that filing the petition to probate the will was sufficient to avoid the six-month time bar.  While the filing of the affidavit of service did not occur until after the hearing to probate the will, such late filing, the court held, does not operate to bar the will from admission to probate.  The son received actual notice of the hearing.  Accordingly, upheld the trial court’s order admitting the will to probate and the ordering of the distribution of the estate to the granddaughters.  In re Estate of Rickabaugh, No. 111,389, 2015 Kan. App. LEXIS 61 (Kan. Ct. App. Sept. 11, 2015).

The petitioner defaulted on a car loan in 2005 with the car also being repossessed that year.  After the car was sold, an unpaid balance remained on the loan.  The lender submitted the account balance due to five collection agencies over several years to collect.  However, the balance due on the loan was not able to be collected.  In 2011, the lender wrote cancelled the debt and issued Form 1099-C to the petitioner in 2011.  The petitioner had moved, however, and the 1099-C was returned as undeliverable.  The petitioner did not report the income from the discharged debt on the 2011 return.  The IRS received a copy of the 1099-C and sought to collect the amount from the petitioner as income that should have been reported on the 2011 return.  While the petitioner argued that the income wasn't reportable due to the lack of receiving Form 1099-C, that argument failed.  However, the petitioner also argued that the income should have been reported in 2008 which was a tax year now closed.  The petitioner reached that conclusion based on the instructions for Form 1099-C which create a rebuttable presumption that an identifiable event has occurred during a calendar year if a creditor has not received a payment on a debt at any time during a testing period ending at the close of the year.  The testing period is a 26-month period.  The last payment date on the loan was June 20, 2005, and the 36-month period expired on June 20, 2008.  The IRS bore the burden of proof under I.R.C. Sec. 6201(d) and was required to produce evidence of more than just receipt of Form 1099-C because the petitioner raised a reasonable dispute at the accuracy of the 1099-C and cooperated with the IRS.  Clark v. Comr., T.C. Memo. 2015-175.


When an internet domain name is acquired from the secondary market (where it is already constructed and where the taxpayer will maintain it) for use in the taxpayer's trade or business, the IRS has stated that the cost of the acquisition is to be amortized over 15 years for non-generic domain names - those specific to a company, and generic domain named - those not tied to a specific company.  The costs are to be capitalized under Treas. Reg. Sec. 1.263(a)-4.  Non-generic domain names are amortizable intangibles under Treas. Reg. Sec. 1.197-2(b)(10) or 1.197-2(b)(6).  Generic domain names are amortizable intangibles under Treas Reg. Sec. 1.197-2(b)(6).  The IRS did not provide guidance on the result if the domain name was purchased from someone not currently using the domain name.  That would also seem to be amortizable over 15 years via the safe harbor of Treas. Reg. Sec. 1.167(a)-3(b).  C.C.A. 201543014 (Sept. 10, 2015).  

The petitioners, a married couple, established an irrevocable family trust and transferred property worth $3.262 million to the trust.  The trust named 60 beneficiaries, primarily family members.  The trust language required the trustees to notify all beneficiaries of their right to demand withdrawal of trust funds within 30 days o receiving notice and directed the trustee to make distributions upon receipt of a timely exercised demand notice.  In addition, the trust allowed the trustee to make distributions for the health, education, maintenance or general support of any beneficiary or family member.  The trust also specified that a beneficiary would forfeit trust rights upon opposing distribution decisions of the trustees.  On separate gift tax returns for 2007 the petitioners each claimed annual gift tax exclusion of $12,000 (the maximums per done for 2007) for each of the 60 beneficiaries - $720,000 per spouse.  The IRS denied the exclusions on the basis that the gifts were not present interests because the trustees might refuse to honor a withdrawal demand and have the demand submitted to an arbitration panel (as established in the trust), and the beneficiaries would not seek to enforce their rights in court due to the trust language causing forfeiture if they challenged trustee decisions.  As such, the IRS held that the withdrawal rights of the beneficiaries was illusory and the gifts were not of present interests.  The Court disagreed with the IRS noting that merely seeking arbitration when a trustee breached fiduciary duties by refusing a demand notice did not make the gifts of future interests.  The court also held that the trust forfeiture language only applied to discretionary distributions and did not apply to mandatory withdrawal distributions.  In subsequent litigation, the Tax Court held that the IRS position was sufficiently justified to defeat the petitioners' claim for attorney fees.  Mikel v. Comr., T.C. Memo. 2015-64.  The subsequent litigation involving the fee issue is Mikel v. Comr., T.C. Memo. 2015-173.

The plaintiff owns and operates an oil refinery in Texas.  After a 2002 inspection of the facility, the Environmental Protection Agency (EPA) filed a criminal indictment against the defendant for Clean Air Act violations for failure to cover tanks with emission-control equipment, and for "taking" migratory birds in violation of the Migratory Bird Treaty Act (MBTA).  The trial court found the defendant guilty of three violations of the MBTA on the basis that liability under the MBTA could result irrespective of the defendant's intent simply based on proximate cause.  On appeal, the court reversed.  The appellate court applied the well-understood common law meaning of "take" (when not combined with "harass" or "harm") so as to preclude events that cause mere accidental or indirect harm to protected birds.  The court determined that the evidence did not show that the equalization tanks were utilized with the deliberate intent to cause bird deaths.  In so holding, the court rejected contrary holdings of the Second and Tenth Circuits on the issue.  The court also noted that an MBTA violation would not arise from bird collisions with electrical transmission lines, thus power companies would not need to seek an incidental take permit  from  the USFWS in the Fifth Circuit.  United States v. Citgo Petroleum Corp, et al., No. 14-40128, 2015 U.S. App. LEXIS 15865 (5th Cir. Sept. 4, 2015), rev'g. and remanding, 893 F. Supp. 2d 841 (S.D. Tex. 2012).

The IRS, with this private letter ruling, granted a surviving spouse (as executor) the right to make a late portability election for the amount of the deceased spouse's unused exclusion amount (DSUEA).  The IRS determined that it had discretion to allow a late election in this situation because the estate was not required to file Form 706.  The IRS has no discretion to allow a late election when the due date is set by statute as it is, for example, for estates that have a filing requirement due to being a taxable estate.  The IRS also noted that if it is later determined that the estate exceeded the amount required to file an estate tax return that portability would not be allowed because the IRS, in that situation, would be unable to grant relief.  Priv. Ltr. Rul. 201536005 (Jun. 4, 2015).

A debtor borrowed money from a lender and pledged dairy cattle as collateral.  The lender secured an interest in the cattle.  The debtor later borrowed additional money from the lender, pledging crops, farm products and livestock as collateral with lender's security interest containing a dragnet clause.  The lender secured its interest.  The debtor later entered into a "Dairy Cow Lease" with a third party to allow for expansion of the herd.  The third party lessor perfected its interest in the leased cattle.  The debtor filed Chapter 12 bankruptcy and the bankruptcy court determined that the lease arrangement actually created a security interest rather than being a true lease.  The court noted that the "lease"  was not terminable by the debtor and the lease term was for longer than the economic life of the dairy cows.  The third party lessor also never provided any credible evidence of ownership of the cows, and the parties did not strictly adhere to the "lease" terms.  The court noted that the lender filed first and had priority as to the proceeds from dairy cows.  In addition, the bankruptcy court held that the lender's prior perfected security interest attached to all of the cows on the debtor's farm and to all milk produced post-petition and milk proceeds under 11 U.S.C. Sec. 552(b).   In a later action in the district court, a different creditor failed to comply with court’s order requiring posting of bond as a condition to stay the effect of the court’s prior ruling.  As a result, there was no stay in effect during pendency of the appeal and the lender was entitled to have the proceeds turned over to it.  A feed supplier creditor did not have standing to seek surcharge of the bank’s collateral under 11 U.S.C. Sec. 506(c).  The bankruptcy trustee did not file a motion for surcharge and court could not order the amount that the supplier paid for feed deliveries to be retained from funds turned over to the lender.  The lender's motion for abandonment and turnover of proceeds was granted.  On further review of the bankruptcy court's decision concerning the dairy cow lease, the appellate court reversed.  The appellate court determined that under applicable law (AZ) as set forth in the "lease" agreement, a fact-based analysis governed the determination of the nature of the agreement.  However, if the lease term is for longer than the economic life of the goods involved, the "lease" is a per se security agreement.  The bankruptcy court focused on the debtor's testimony that he culled about 30 percent of the cattle annually which would cause the entire herd to turnover in 40 months.  That turnover time of 40 months was less than the 50-month lease term.  Thus, according to the bankruptcy court, the lease was a security agreement.  The appellate court disagreed with this analysis, holding that the agreement required the focus to be on the life of the herd rather than individual cows in the herd because the debtor had a duty to return the same number of cattle originally leased rather than the same cattle.  Thus, the agreement was not a per se security agreement.  On the economics of the transaction, the appellate court held that the lender failed to carry its burden of establishing that the actual economics of the transaction indicated the lease was a disguised security agreement.  There was no option for the debtor to buy the cows at any price, and there was no option at all.  The court remanded the case to the bankruptcy court.  The cattle owned outright by the debtor were sold at auction by the bankruptcy trustee subject to the security interest of the bank.  The debtor had purchased the cattle with commingled funds from the bank's account which was sufficient for the bank's lien to attach and the court, on remand, determined that it was immaterial that the funds were later reimbursed by a third party under the lease.  Thus, the proceeds of the auction were subject to the bank's security interest and were the bank's property.  The leasing party's brand on the cows was not sufficient under state (KY) law to establish ownership of the cows because it was unregistered.  After-acquired livestock were also subject to the bank's lien, as being proceeds of the pre-petitioner lien.  In re Purdy, No. 12-11592(1)(12), 2015 Bankr. LEXIS 2938 (W.D. Ky.  Sept. 2, 2015), on remand from, Sunshine Heifers, LLC v. Citizens First Bank (In re Purdy), No. 13-6412, 2014 U.S. App. LEXIS 15586 (6th Cir. Aug. 14, 2014), rev'g., 2013 Bankr. LEXIS 3813 (Bankr. W.D. Ky. Sept. 12, 2013).


I.R.C. Sec. 6501(c)(9) says that if a gift tax return is required to be filed and is not filed, the IRS can collect the gift tax (with interest) at any time - the statute of limitations never runs.  In this matter, the taxpayer Filed Form 709 to report the transfer of partnership interests in two partnerships.  The Form 709 did not identify one of the partnerships involved and did not adequately describe the method used to determine the fair market value of both partnership interests.  Also, the employer identification number (EIN) used on both Form 709 and the valuation of gifts statement attached to the Form 709 was missing a digit.  The IRS noted that the appraisals valued the land held by each partnership rather than the value of the partnership interests that were transferred.  In addition, the Form 709 used incorrect, abbreviated names for the partnerships.  Based on these facts, the IRS determined that the gifts had not been adequately disclosed for failure to sufficiently describe the transferred property.  F.A.A. 20152201F (May 29, 2015).     

In this Field Attorney Advice from the IRS, the taxpayer loaned money against real estate that subsequently declined in value.  The real estate was foreclosed upon and the taxpayer lost money.  The taxpayer determined the loss in value of the remaining loans it held by estimating the date it expected to receive cash from the sale of the note or the sale of the real estate at foreclosure and then discounting that amount by the current appraised value to the present by using the discount rate of interest on the loan.  The IRS determined that a partial bad debt deduction was not allowed because Treas. Reg. Sec. 1.166-3(a)(2) requires the deduction be tied to an amount that is charged off during the year.  Here, the taxpayer had merely increased its reserve account for bad debts, which decreased its balance sheet assets.  It is insufficient to expect that some debts will be repaid at less than what the underlying note lists as the repayment terms.  An amount must actually be charged off.  F.A.A. 20153501F (Apr. 22, 2015).

The plaintiff, an electric power company, condemned a power line easement that bisected two tracts of the defendants (a married couple).  The easement occupied 12 acres out of 460.  The plaintiff offered the defendants $96,465 for the property taken.  On appeal, the trial court jury determined the property taken was worth $1,922,559.  The plaintiff appealed the jury award, claiming that the trial court erred by failing to exclude the defendants' expert testimony and that the trial court erred by allowing testimony as to a valuation approach that was not in accord with K.S.A. Sec. 26-513(e).  The court upheld the jury award because the defendants' first expert testimony, while not a valuation expert, laid a proper foundation for the testimony of the defendants' valuation expert.  The defendants' valuation expert approach did follow the statute and the trial court did not abuse its discretion in allowing the testimony.  The evidence was legally sufficient to support the jury's determination.  The trial court also did not err in allowing into evidence an option contract that had been entered into with a developer.  Kansas City Power & Light Company, No. 110,573, 2015 Kan. LEXIS 720 (Kan. Sup. Ct. Aug. 28, 2015).

As part of his job duties for the defendant, the plaintiff slipped while mopping up the bathroom floor of the defendant's facility and injured himself.  The defendant did not participate in the state's workers' compensation system (the state, TX, is the only state with a voluntary workers' compensation system for non-ag employment).  The premises "defect" was open and obvious to the plaintiff.  By opting out of the workers' compensation system, the defendant could not assert contributory negligence or assumption of risk as a defense.  The legal question presented was whether the defendant breached any duty of care to the plaintiff.  The U.S. Court of Appeals for the Fifth Circuit certified this question to the TX Supreme Court which determined that because there was no contention that the employee was unaware of the hazard involved and no other exception applied, the defendant was entitled to summary judgment.  However, the TX Supreme Court clarified that the premises liability claim was independent of the plaintiff's "necessary instrumentalities" claim  and that the defendant owed the plaintiff duties in addition to the premises liability duty.  Because the trial court did not consider whether the defendant provided the plaintiff with the necessary instrumentalities of his employment, the court remanded on that issue, but affirmed on the premises liability claim.  Austin v. Kroger Texas L.P., No. 12-10772, 2015 U.S. App. LEXIS 15312 (5th Cir. Aug. 28, 2015).

In this case, the petitioner sold his home and 80-acres of land on the installment basis for a gain of $657,796.  The petitioner calculated the gain by excluding $500,000 of gain attributable to the home sale exclusion of I.R.C. Sec. 121.  The buyers defaulted and the petitioner reacquired the property in full satisfaction of the debt.  The IRS claimed the petitioner had to recognize gain upon repossession to the extent of money and other property received before repossession, which would, in essence, recapture the Sec. 121 exclusion previously claimed.  The court agreed with IRS that the general rules of I.R.C. Sec. 1038 applied  and noted that the petitioner was actually in a better position than before the sale because he had received some payments for the sale before the buyer's default and recouped the property.  On appeal, the court affirmed.  The court noted that there are two types of gain involved on reacquisition of real estate in accordance with I.R.C. Sec. 1038(b)(1) - gain "returned as income" on a prior return, and gain not yet "returned as income."  Here, the court noted that the petitioner had reported $56,920 as income.  The petitioner had not reported the $500,000 of gain attributable to the house, thus it was not "returned as income" on a prior return.  Thus, by failing to resell the property within a year, the petitioner recognizes $505,000 received in cash, less the $56,920 already recognized as income.  Debough v. Comr., 142 T.C. No. 17 (2014), aff'd.,No. 14-3036, 2015 U.S. App. LEXIS 15194 (8th Cir. Aug. 28, 2015).

The plaintiff filed  a Freedom of Information Act (FOIA) request with the IRS to determine whether the Obama White House had sought private taxpayer information from the IRS after the White House had made remarks on the tax status of Koch Industries (a private company).  The IRS refused to release any information, citing Internal Revenue Code Sec. 6103 which bars the IRS from divulging tax return information and divulging requests for taxpayer information.  The plaintiff then sued and the court disagreed with the IRS position, denying IRS' motion to dismiss the case.  The court held that I.R.C. Sec. 6103 does not allow IRS to shield records that might indicate that the White House misused confidential taxpayer information or that White House officials made an improper attempt to access that information.  Cause of Action v. Internal Revenue Service, No. 13-0920, 2015 U.S. Dist. LEXIS 114203 (D. D.C. Aug. 28, 2015).

The day before the effective date of the Environmental Protection Agency’s Clean Water of the United States (WOTUS) rule (Fed. Reg. 37,054-127,), a federal judge issued a preliminary injunction to stop the EPA and the U.S. Army Corps of Engineers from enforcing it. The court determined that the plaintiffs (multiple states) were substantially likely to succeed on the merits or had at least a fair chance to succeed.  The court stated that the evidence showed that it was likely that the EPA has violated its Congressional grant of authority when it developed the rule and also failed to comply with the Administrative Procedure Act requirements.  The court noted that a broad segment of the public would benefit from the preliminary injunction because it would ensure that federal agencies do not extend their power beyond the express delegation from Congress. A balancing of the harms and analysis of the public interest revealed that the risk of harm to the States was great and the burden on the EPA was slight.  The injunction was requested by States of North Dakota, Alaska, Arizona, Arkansas, Colorado, Idaho, Missouri, Montana, Nebraska, Nevada, South Dakota, and Wyoming, and the New Mexico Environment Department.  The EPA immediately took the position that the injunction applies only to those states that sought the injunction. The old rule, the agency said, will be applied in those states. The new rule, however, will be applied by the EPA and the U.S. Army Corps in the remaining states beginning effective August 28, 2015.  North Dakota, et al. v. United States Environmental Protection Agency, No. 3:15-cv-59, 2015 U.S. Dist. LEXIS 113831 (D. N.D. Aug. 27, 2015).


The plaintiff sells grapevine rootstock and challenged the mandatory assessments it must pay to the California Rootstock Improvement Commission to help fund research for pest-resistant and drought-resistant rootstock.  The plaintiff challenged the mandatory assessment as an unconstitutional exercise of the state's police power that violated the plaintiff's liberty interests and due process rights under the U.S. and California constitutions.  The plaintiff had the ability to conduct its own research for it own competitive advantage and claimed it had a right to refuse to help fund research that benefits its competitors and the industry as a whole.  The trial court upheld the mandatory assessment and the appellate court agreed.  The appellate court determined that the Commission was properly created for the public benefit and that a university researcher at UC Davis did not dupe the legislature and the grape rootstock industry into creating the Commission for the researcher's benefit.  The court found that the evidence did not support the plaintiff's conspiracy claims and that the law creating the Commission and the assessment was constitutionally valid.  Duarte Nursery, Inc. v. California Grape Rootstock Improvement Commission, et al., No. C071578, 2015 Cal. App. LEXIS 735 (Cal. Ct. App. Aug. 25, 2015).

The petitioner resided in Hawaii with his common law wife.  He claimed a dependency deduction for her as she was listed as his common law wife on their return.  The IRS stipulated to an "affidavit of dependency" that she signed in which she said that during the tax year in question that she lived in the petitioner's home, had gross income of less than $3,500, and that the petitioner provided more than 50% of her support.  The court accepted the affidavit as evidence of the petitioner being entitled to the dependency deduction.  Shimanek v. Comr., T.C. Memo. 2015-165.

The petitioners, a married couple, was deemed not be in the real estate sales business with a profit intent for the years at issue based on an analysis of multiple factors.  The court also determined that the petitioners did not substantiate their expenses for their deductions claimed on Schedule C.  Pouemi v. Comr., T.C. Memo. 2015-161.